Case Study: Merck KGaA Global Guarantee Management - L/C Management
The pharmaceutical and chemical corporation Merck KGaA wanted to break new ground and introduce a consolidated bank guarantee facility to help improve the speed and efficiency of its supply chain and internal financing. Like every business the corporation has to rely on bank guarantees or letters of credit (L/Cs) issued by financial institutions to ensure that beneficiaries in its supply chain get payment undertakings and notifications. With 250 subsidiaries across the globe the complexity and cost of the process was something the firm wanted to improve. The procedure is, of course, a prerequisite for any operations unit at a multinational treasury and is required by customs and tax authorities, not to mention tender organisations if you are looking to win new business or prove bona fides.
The previous workflow relied on local terms and conditions with the individual banks that Merck KGaA’s 250 subsidiaries dealt with, with the onus being on local units to sort themselves out. This was not an efficient procedure, however, and Merck saw an opportunity to centralise the group-wide bank guarantee business at its main German treasury unit and establish a standardised global process that had better transparency, quicker turnaround times and was scalable for the future.
The problem was that, as far as it is aware, Merck is the first multinational company to attempt to introduce a global guarantee and L/C management system so it couldn’t simply copy best practice or install ‘offthe-shelf’ technology, instead having to rely on developing its own system, with an internal team of only two people and no budget for external consultants. Another challenge was that whatever was introduced had to comply with the local trade finance legal rules and regulations in each and every country around the world where the pharmaceutical and chemical giant operates.
An unconventional approach was therefore needed and the small treasury project team of two people embarked on a seven month long exercise, in addition to daily responsibilities, that ran from February 2011 until the end of the year. The team, led by Joerg Bermueller, head of cash and risk management at Merck KGaA, questioned each Merck subsidiary to scope out the project and developed a request for proposal (RFP). This led to a competitive tender and the selection of a single banking partner, and ultimately a new infrastructure for the start of 2012.
There were seven distinct project phases:
After the seven-month project, Merck was left with a single worldwide bank guarantee facility worth over €150m, valid for all 250 subsidiaries. The global online pricing grid also does away with the myriad of different platforms that each subsidiary used to use, delivering a single web-based tool. Other benefits include:
The benefits of Merck’s new consolidated bank guarantee solution is that it has enhanced internal processes, meaning that paper has been eliminated and the time taken to submit an L/C request has been reduced from 60 minutes to 12. The issuance timeframe has been slashed from 14 days to just 24 hours.
Increased transparency has also resulted with all guarantees now residing in one online system, so the database can be mined and interrogated more easily. In addition, email notifications are now sent for required actions such as requests for authorisations and pre-notifications go out for expiring guarantees to ensure a smoother, easier procedure. The group accounting manual guarantee reporting process at the end of the year has naturally been made redundant. Global monitoring of fees and commissions is also now possible and, crucially, financial risk positions in the supply chain can also now be included at group level much more easily.
Complexity has also been reduced with the number of banks Merck uses for guarantees falling from 103 to one. The amount of required documents has been cut from 575 to just five per year, covering balance sheets to signature cards, profit and loss sheets, passport copies and commercial registers. More than 60 previously local-only processes have been eliminated.
Significant Cost Savings
As a result of the project, on-going bank fees have been reduced by almost half, so that they are now much less than €1m per year. The number of work hours needed for guarantee handling has also been cut from 250 hours every year to 25 hours per annum now, freeing up treasury staff and others to undertake other tasks. Courier fees in the procurement unit have been cut and Merck is estimating it will save €2m in extra efficiency savings resulting from the improved workflow.
The small project team of just two people achieved a lot, working in conjunction with their banking partner, and did so for an implementation cost of only €15,000, although Deutsche Bank will still receive reduced on-going fees of course. The seven month implementation timeframe, equating to approximately 200 work days on top of the project team’s usual everyday responsibilities, was also impressive. Merck is now enjoying the benefits of its new global, fully automated, and standardised solution.